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EX-4.5 - EX-4.5 - TANDY BRANDS ACCESSORIES INC | d70115exv4w5.htm |
EX-10.2 - EX-10.2 - TANDY BRANDS ACCESSORIES INC | d70115exv10w2.htm |
EX-10.1 - EX-10.1 - TANDY BRANDS ACCESSORIES INC | d70115exv10w1.htm |
EX-31.1 - EX-31.1 - TANDY BRANDS ACCESSORIES INC | d70115exv31w1.htm |
EX-31.2 - EX-31.2 - TANDY BRANDS ACCESSORIES INC | d70115exv31w2.htm |
EX-32.1 - EX-32.1 - TANDY BRANDS ACCESSORIES INC | d70115exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2009
Commission File Number 0-18927
TANDY BRANDS ACCESSORIES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
75-2349915 (I.R.S. Employer Identification No.) |
690 East Lamar Boulevard, Suite 200, Arlington, TX 76011
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
817-548-0090
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report:
Not Applicable
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date.
Class | Number of shares outstanding at November 12, 2009 | |
Common stock, $1.00 par value | 7,058,371 |
TABLE OF CONTENTS
2
Table of Contents
References in this Quarterly Report on Form 10-Q to we, our, us, or the Company refer to
Tandy Brands Accessories, Inc. and its subsidiaries unless the context requires otherwise.
This Form 10-Q contains forward-looking statements regarding future events and our future results
that are subject to the safe harbors created under the Securities Act of 1933 and the Securities
Exchange Act of 1934. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates, continues, may, variations of such words, and similar expressions are
intended to identify forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, our anticipated growth and trends in our business,
and other characterizations of future events or circumstances are forward-looking statements. We
have based these forward-looking statements on our current expectations about future events,
estimates and projections about the industry in which we operate. These statements are not
guarantees of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Our actual results may differ materially from those suggested by these
forward-looking statements for various reasons, including those identified under Risk Factors
included in our 2009 Annual Report on Form 10-K. Given these risks and uncertainties, you are
cautioned not to place undue reliance on forward-looking statements. The forward-looking
statements included in this report are made only as of the date hereof. Except as required under
federal securities laws and the rules and regulations of the United States Securities and Exchange
Commission, we do not undertake, and specifically decline, any obligation to update any of these
statements or to publicly announce the results of any revisions to any forward-looking statements
after the distribution of this report, whether as a result of new information, future events,
changes in assumptions, or otherwise.
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Operations
(in thousands except per share amounts)
Unaudited Consolidated Statements Of Operations
(in thousands except per share amounts)
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Net sales |
$ | 37,193 | $ | 34,617 | ||||
Cost of goods sold |
22,964 | 22,607 | ||||||
Gross margin |
14,229 | 12,010 | ||||||
Selling, general and administrative expenses |
13,194 | 12,429 | ||||||
Depreciation and amortization |
677 | 569 | ||||||
Acquisition transaction costs |
289 | | ||||||
Total operating expenses |
14,160 | 12,998 | ||||||
Operating income (loss) |
69 | (988 | ) | |||||
Interest expense |
(268 | ) | (148 | ) | ||||
Other income |
36 | 89 | ||||||
Acquisition bargain purchase gain |
1,379 | | ||||||
Income (loss) before income taxes |
1,216 | (1,047 | ) | |||||
Income taxes |
113 | 233 | ||||||
Net income (loss) |
$ | 1,103 | $ | (1,280 | ) | |||
Income (loss) per common share |
$ | 0.16 | $ | (0.18 | ) | |||
Income (loss) per common share assuming dilution |
$ | 0.15 | $ | (0.18 | ) | |||
Cash dividends declared per common share |
$ | | $ | 0.04 | ||||
Common shares outstanding |
6,930 | 6,988 | ||||||
Common shares outstanding assuming dilution |
7,115 | 6,988 |
The accompanying notes are an integral part of these consolidated financial statements.
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Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands)
Unaudited Consolidated Balance Sheets
(in thousands)
September 30 | June 30 | |||||||
2009 | 2009 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,861 | $ | 3,670 | ||||
Accounts receivable |
26,932 | 19,566 | ||||||
Inventories |
36,097 | 23,022 | ||||||
Other current assets |
7,184 | 8,282 | ||||||
Total current assets |
72,074 | 54,540 | ||||||
Property and equipment |
5,431 | 3,776 | ||||||
Other assets: |
||||||||
Intangibles |
6,647 | 2,742 | ||||||
Other assets |
893 | 908 | ||||||
Total other assets |
7,540 | 3,650 | ||||||
$ | 85,045 | $ | 61,966 | |||||
Liabilities And Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,001 | $ | 9,369 | ||||
Accrued expenses |
6,447 | 8,056 | ||||||
Acquisition earn-out |
3,767 | | ||||||
Note payable |
16,524 | | ||||||
Total current liabilities |
38,739 | 17,425 | ||||||
Other liabilities |
2,999 | 2,825 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $1.00 par value, 1,000 shares authorized, none issued |
| | ||||||
Common stock, $1.00 par value, 10,000 shares authorized,
7,058 shares and 7,037 shares issued and outstanding |
7,058 | 7,037 | ||||||
Additional paid-in capital |
34,962 | 34,867 | ||||||
Retained earnings (deficit) |
1,047 | (56 | ) | |||||
Other comprehensive income |
1,364 | 984 | ||||||
Shares held by Benefit Restoration Plan Trust |
(1,124 | ) | (1,116 | ) | ||||
Total stockholders equity |
43,307 | 41,716 | ||||||
$ | 85,045 | $ | 61,966 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Tandy Brands Accessories, Inc. And Subsidiaries
Unaudited Consolidated Statements Of Cash Flows
(in thousands)
Unaudited Consolidated Statements Of Cash Flows
(in thousands)
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Cash flows provided by operating activities: |
||||||||
Net income (loss) |
$ | 1,103 | $ | (1,280 | ) | |||
Adjustments to reconcile net income (loss)
to net cash used by operating activities: |
||||||||
Acquisition bargain purchase gain |
(1,379 | ) | | |||||
Doubtful accounts receivable provision |
153 | 70 | ||||||
Depreciation and amortization |
681 | 577 | ||||||
Stock compensation expense |
173 | 90 | ||||||
Amortization of debt costs |
71 | 42 | ||||||
Other |
380 | (270 | ) | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(7,519 | ) | (4,334 | ) | ||||
Inventories |
(9,548 | ) | (12,954 | ) | ||||
Other assets |
1,499 | 1,583 | ||||||
Accounts payable |
2,428 | 2,185 | ||||||
Accrued expenses |
(1,417 | ) | (29 | ) | ||||
Net cash used by operating activities |
(13,375 | ) | (14,320 | ) | ||||
Cash flows used for investing activities: |
||||||||
Acquisition |
(3,921 | ) | | |||||
Purchases of property and equipment |
(560 | ) | (81 | ) | ||||
Funding supplemental executive retirement plan trust |
| (1,060 | ) | |||||
Net cash used for investing activities |
(4,481 | ) | (1,141 | ) | ||||
Cash flows provided by financing activities: |
||||||||
Stock purchase program withdrawals |
| (89 | ) | |||||
Dividends paid |
| (282 | ) | |||||
Change in cash overdrafts |
204 | 1 | ||||||
Acquisition earn-out payments |
(681 | ) | | |||||
Net note borrowings |
16,524 | 15,078 | ||||||
Net cash provided by financing activities |
16,047 | 14,708 | ||||||
Net decrease in cash and cash equivalents |
(1,809 | ) | (753 | ) | ||||
Cash and cash equivalents beginning of year |
3,670 | 2,855 | ||||||
Cash and cash equivalents end of period |
$ | 1,861 | $ | 2,102 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Accounting Principles
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain amounts have been
reclassified in the fiscal 2009 financial statements to conform to the fiscal 2010 presentation,
including restatement of business segment information as the result of restructuring our
organization.
The preparation of our consolidated financial statements requires the use of estimates that affect
the reported value of assets, liabilities, revenues, and expenses. These estimates are based on
historical experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for our conclusions. We continually evaluate
the information used to make these estimates as the business and economic environment change,
including evaluation of events subsequent to the end of the quarter through November 13, 2009, the
financial statements issuance date. Actual results may differ from these estimates under different
assumptions or conditions. Such differences could have a material impact on our future financial
position, results of operations, and cash flows.
The consolidated balance sheet at June 30, 2009 has been derived from the audited consolidated
financial statements at that date, but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. These
interim unaudited consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in our 2009 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Historically our first and second quarter sales and operating results reflect a seasonal increase
compared to the third and fourth quarters of our fiscal year. Sales for the first quarters of
fiscal 2010 and 2009 were not consistent with historical patterns due to the very difficult retail
environment. Operating results for the first three months of fiscal 2010 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2010.
Note 2 Fair Value Measurements
We measure fair values using unadjusted quoted prices in active markets (Level 1 inputs), quoted
prices for similar instruments in active or inactive markets, or other directly-observable factors
(Level 2 inputs), or our assumptions about the assumptions market participants would use (Level 3
inputs). Our financial instruments consist primarily of cash, trade receivables and payables, our
credit facility, and earn-out contingent consideration. The carrying values of cash and trade
receivables and payables are considered to be representative of their respective fair values. Our
credit facility bears interest at floating market interest rates; therefore, the fair value of
amounts borrowed approximates the carrying value. We measure the earn-out contingent consideration
based on estimated net sales and present value discount rates.
The following presents the assets and liabilities we measure at fair value each reporting period,
the measurement input level, and their classification in our financial statements (in thousands).
Fair | ||||||||||||
Value | September 30 | June 30 | ||||||||||
Level | 2009 | 2009 | ||||||||||
Supplemental executive retirement obligation trust
included in other current assets |
1 | $ | 1,847 | $ | 1,705 | |||||||
Supplemental executive retirement obligation
included in accrued expenses |
1 | 1,847 | 1,705 | |||||||||
Acquisition earn-out |
3 | 3,767 | |
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Changes in the fair value of our acquisition earn-out contingent consideration obligation were (in
thousands):
July 9, 2009 |
$ | 4,373 | ||
Payments |
(660 | ) | ||
Expense |
54 | |||
September 30, 2009 |
$ | 3,767 | ||
Note 3 Recent Accounting Pronouncements
Effective July 1, 2009, we adopted the accounting and reporting requirements of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC), Business
Combinations, (ASC 805-10) originally issued by the FASB in December 2007 as Statement of Financial
Accounting Standards No. 141 (revised 2007), Business Combinations, together with the guidance in
FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets, (ASC
350-30-55) issued in April 2008. Together they require recognition of assets acquired and
liabilities assumed at their fair values at the acquisition date using the acquisition method,
including goodwill recognition as a residual or a gain from a bargain purchase. The new accounting
had no effect on previously acquired assets, liabilities, or goodwill, but the accounting for
acquisitions after June 2009 differs from acquisitions before July 2009.
Note 4 Acquisition
On July 9, 2009, we purchased from Chambers Belt Company (Chambers), a wholly-owned subsidiary of
Phoenix Footwear Group, Inc., its intellectual property, customer relationships, manufacturing
equipment, and substantially all of its inventory. We also assumed its licenses with Wrangler
Apparel, Inc. (Wrangler) to sell mens and boys belts and accessories in the mass merchants and
western markets (Wrangler Mass and Western/Specialty, respectively) and a manufacturing
contract between Chambers and Maquiliadora Chambers de Mexico, S.A. de C.V. (MCM). We have
employed certain of Chambers employees and leased its former facilities in Commerce, California.
We paid $3.9 million to Chambers and certain of its vendors. The earn-out provisions of the
purchase agreement require payment of 21.5% of our estimated $25.5 million of net sales through
July 9, 2010 of private label and Wrangler Mass products formerly sold by Chambers, with a $2.0
million minimum guarantee. The Wrangler Mass and Western/Specialty licenses expire in June 2010
and December 2010, respectively. Both licenses provide for 5% of net sales royalty payments
through December 2009 and the Wrangler Mass license provides for a 4% royalty thereafter. The
licenses have minimum royalty guarantees of $497,000 through December 2009 and the
Western/Specialty license has a $210,000 annual guarantee thereafter. The Wrangler Mass royalties
are payable by Chambers from the earn-out, but are guaranteed by us.
Under the MCM contract, MCM manufactures products for us under the direction and supervision of our
employees utilizing machinery we purchased from Chambers and raw materials which we supply. There
is a minimum wage guarantee for any week we do not require MCM to manufacture products for us and
the contract may be terminated on sixty days notice.
The following presents the estimated fair values of the net assets
acquired (in thousands).
Inventories |
$ | 3,527 | ||
Equipment |
1,550 | |||
Customer list |
3,016 | |||
Trade names |
1,150 | |||
Earn-out prepayment |
430 | |||
Total assets |
9,673 | |||
Earn-out consideration discounted at 6.625% |
(4,373 | ) | ||
Net assets |
$ | 5,300 | ||
We derived the estimated fair values from assumptions we believe unrelated market participants
would use based on both observable and unobservable marketplace factors. The earn-out contingent
consideration fair value is the present value of our obligation based on probability-weighted
estimates of the net sales of private label and Wrangler Mass products formerly sold by Chambers
that we may sell during the earn-out period, a Level 3 fair value estimate.
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Each reporting period,
the contingent consideration may be revalued as the result of changes in our estimates of net
sales, their timing, or the discount rate, with increases and decreases being recorded in our
statements of operations.
Our estimate of the net assets fair value exceeded the estimated fair value of the total
consideration we paid and will pay over the earn-out period. Consequently, the acquisition
resulted in a $1.4 million bargain purchase gain which we believe resulted from Chambers financial
difficulties and uncertainties relating to extending the terms of certain licenses.
Acquired equipment is being depreciated using the straight line method over periods of three to
five years (fiscal 2010 first quarter $84,000). The customer list is being amortized over seven
years in proportion to the estimated undiscounted cash flows which may be derived from the acquired
assets (fiscal 2010 first quarter $182,000). The trade names have indefinite-lives and,
therefore, are not being amortized.
Net sales of $6.1 million and $1.4 million of the $8.5 million of our accessories segment income
attributable to the acquisition are included in our fiscal 2010 statement of operations. Sales in
fiscal 2010 prior to the acquisition date would have been minimal. We are unable to provide
financial information as if the Chambers acquisition had occurred as of the beginning of fiscal
2009 as we do not have what we believe to be reliable financial information for Chambers during
that time period.
Note 5 Business Segment Information
We sell our products through all major retail distribution channels throughout North America,
including mass merchants, national chain stores, department stores, mens and womens specialty
stores, catalog retailers, grocery stores, drug stores, golf pro shops, sporting goods stores, and
the retail exchange operations of the United States military. Our business segments are based on
product categories belts and small leather goods, eyewear, neckwear, sporting goods, and our
Canadian subsidiary (collectively, Accessories), and gifts. Each is measured by management based
on income consisting of net sales less cost of goods sold, product distribution expenses, and
royalties utilizing accounting policies consistent in all material respects with those described in
Note 2 of the notes to consolidated financial statements included in our 2009 Annual Report on Form
10-K filed with the Securities and Exchange Commission. No inter-segment revenue is recorded.
Assets, related depreciation and amortization, and selling, general and administrative expenses are
not allocated to the segments.
The following presents operating information by segment and reconciliation of segment income to our
consolidated operating income or loss (in thousands).
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Net sales: |
||||||||
Accessories |
$ | 31,786 | $ | 31,205 | ||||
Gifts |
5,407 | 3,412 | ||||||
$ | 37,193 | $ | 34,617 | |||||
Segment income: |
||||||||
Accessories |
$ | 8,529 | $ | 7,688 | ||||
Gifts |
644 | (586 | ) | |||||
9,173 | 7,102 | |||||||
Selling, general and administrative expenses |
(8,138 | ) | (7,521 | ) | ||||
Depreciation and amortization |
(677 | ) | (569 | ) | ||||
Acquisition transaction costs |
(289 | ) | | |||||
Operating income (loss) |
$ | 69 | $ | (988 | ) | |||
Note 6 Credit Arrangements
We have a $27.5 million credit facility for borrowings and letters of credit which was amended
effective October 6, 2009 to extend its term, reduce the interest rate, and adjust the tangible net
worth financial ratio. At September 30, 2009, we had $27.3 million borrowing availability based on
our accounts receivable and inventory levels and outstanding borrowings of $16.5 million with
interest at 6.5% per annum and letters of credit totaling $844,000. Borrowings, which are due on
the amended facilitys expiration in April 2011, bear interest after the amendment date
9
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at the
daily adjusting one-month LIBOR rate plus 4% (3.5% after June 2010 under specified conditions) or,
if such rate is not available under the terms of the credit facility note, the lenders prime rate
plus 2%.
The credit facility is guaranteed by substantially all of our subsidiaries and is secured by
substantially all of our assets and those of our subsidiaries. It requires the maintenance of a
$32.5 million tangible net worth financial ratio, as adjusted quarterly for future earnings and
issuance of equity ownership interests, as of the end of each fiscal quarter which, if not met,
could adversely impact our liquidity. The facility contains customary representations and
warranties and we have agreed to certain affirmative covenants, including reporting requirements.
The facility also limits our ability to engage in certain actions without the lenders consent,
including, repurchasing our common stock, entering into certain mergers or consolidations,
guaranteeing or incurring certain debt, engaging in certain stock or asset acquisitions, paying
dividends, making certain investments in other entities, prepaying debt, and making certain
property transfers.
Our Canadian subsidiary has a CAD $1.4 million credit facility (direct advances limited to US $1.1
million) secured by its cash, credit balances, and deposit instruments with interest at the
lenders prime or US base rates. There have been no borrowings under this line of credit.
Note 7 Long-Term Incentive Award
Performance units payable 50% in cash and 50% in shares of our common stock following the end of a
three-year performance cycle ending June 30, 2012 were awarded during the first quarter of fiscal
2010. Each unit has a $1.00 assigned value and the fair value of the Companys stock to be issued
is $2.4175 per share based on its grant-date market price and assuming no dividends during the
performance cycle. Based on a 200% achievement target for each year, 1,380,000 units were awarded,
are outstanding and expected to vest, and would be payable in cash of $690,000 and 285,419 shares
of common stock.
Note 8 Income Taxes
The following presents the income tax components (in thousands).
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Federal and state (benefit) |
$ | 442 | $ | (535 | ) | |||
Foreign |
21 | 140 | ||||||
Uncertain tax positions |
55 | 93 | ||||||
Deferred tax valuation allowance |
(405 | ) | 535 | |||||
$ | 113 | $ | 233 | |||||
The federal statutory income tax rate reconciles to our effective income tax rate as follows:
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Statutory rate |
34.0 | % | (34.0 | )% | ||||
State and foreign taxes net of federal tax benefit |
4.1 | (3.8 | ) | |||||
Uncertain tax positions |
4.5 | 8.9 | ||||||
Deferred tax valuation allowance |
(33.3 | ) | 51.1 | |||||
9.3 | % | 22.2 | % | |||||
At September 30, 2009 we had federal income tax net operating loss carryovers of approximately $33
million expiring in 2028 through 2030. Our deferred tax valuation allowance was approximately $21
million.
Note 9 Comprehensive Income
The following presents the components of comprehensive loss (in thousands).
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Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Net income (loss) |
$ | 1,103 | $ | (1,280 | ) | |||
Currency translation adjustments |
380 | (231 | ) | |||||
Comprehensive income (loss) |
$ | 1,483 | $ | (1,511 | ) | |||
Note 10 Earnings Per Share
Our basic and diluted earnings (loss) per common share are computed as follows (in thousands except
per share amounts):
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Numerator for basic and diluted earnings per share: |
||||||||
Net income (loss) |
$ | 1,103 | $ | (1,280 | ) | |||
Denominator: |
||||||||
Weighted-average shares outstanding |
6,930 | 6,986 | ||||||
Contingently issuable shares |
| 2 | ||||||
Denominator for basic earnings per share |
6,930 | 6,988 | ||||||
Effect of dilutive share-based compensation |
185 | | ||||||
Denominator for diluted earnings per share |
7,115 | 6,988 | ||||||
Income (loss) per common share |
$ | 0.16 | $ | (0.18 | ) | |||
Income (loss) per common share assuming dilution |
$ | 0.15 | $ | (0.18 | ) |
Potentially dilutive securities which could have had an antidilutive effect on our per share
results of operations were (in thousands except per share amounts):
September 30 | ||||||||
2009 | 2008 | |||||||
Stock options (exercise prices per share: 2009 $5.31
to $15.60; 2008 $5.63 to $16.81) |
402 | 500 | ||||||
Benefit Restoration Trust shares |
| 97 | ||||||
Nonvested restricted stock not contingently issuable |
| 5 |
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Item 2 should be read in the context of the information included in our 2009 Annual Report on
Form 10-K filed with the Securities and Exchange Commission and elsewhere in this Quarterly Report,
including our consolidated financial statements and accompanying notes in Item 1 of this Quarterly
Report.
BUSINESS
We are a leading designer and marketer of branded mens, womens and childrens accessories,
including belts, small leather goods, eyewear, neckwear, and sporting goods, and gifts. Our
merchandise is marketed under a broad portfolio of nationally recognized licensed and proprietary
brand names, including TOTES®, WRANGLER®, DOCKERS®, DR.
MARTENS®, AMITY®, ROLFS®, CANTERBURY®, PRINCE
GARDNER®, PRINCESS GARDNER®, SURPLUS®, as well as private brands
for major retail customers. We sell our products through all major retail distribution channels
throughout North America, including mass merchants, national chain stores, department stores, mens
and womens specialty stores, catalog retailers, grocery stores, drug stores, golf pro shops,
sporting goods stores, and the retail exchange operations of the United States military.
The purchase of the intellectual property, customer relationships, manufacturing equipment, and
substantially all of the inventory of the Chambers Belt Company and the assumption of its licenses
with Wrangler Apparel, Inc. to sell
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mens and boys belts and accessories in the mass merchants and
western markets (Wrangler Mass and Western/Specialty, respectively) was the most significant
event in the first quarter of fiscal 2010. The transaction and $1.4 million bargain purchase gain
are described in Note 4 of the notes to consolidated financial statements in Item 1 of this
Quarterly Report incorporated herein by reference. The sales and segment income from the
acquisitions are included in our accessories segment.
As the result of restructuring our organization, we changed our reportable business segments in the
first quarter of fiscal 2010 to focus on product categories as
described in Note 5 of the notes to
consolidated financial statements in Item 1 of this Quarterly Report incorporated herein by
reference. Our business segment information for fiscal 2009 has been restated to conform to the
fiscal 2010 presentation.
FISCAL 2010 COMPARED TO FISCAL 2009
Business Segments
The following presents sales, gross margins, and operating expenses for our business segments (in
thousands of dollars).
Three Months Ended | ||||||||
September 30 | ||||||||
2009 | 2008 | |||||||
Net sales: |
||||||||
Accessories |
$ | 31,786 | $ | 31,205 | ||||
Gifts |
5,407 | 3,412 | ||||||
$ | 37,193 | $ | 34,617 | |||||
Gross margin: |
||||||||
Accessories |
$ | 12,407 | $ | 11,280 | ||||
Gifts |
1,822 | 730 | ||||||
$ | 14,229 | $ | 12,010 | |||||
Gross margin percent of sales: |
||||||||
Accessories |
39.0 | % | 36.2 | % | ||||
Gifts |
33.7 | 21.4 | ||||||
Total |
38.3 | 34.7 | ||||||
Operating expenses: |
||||||||
Accessories |
$ | 3,878 | $ | 3,592 | ||||
Gifts |
1,178 | 1,316 | ||||||
$ | 5,056 | $ | 4,908 | |||||
Net sales for the first quarter of fiscal 2010 were $2.6 million greater than the same period last
year, the first year-over-year increase in 12 quarters. Accessories segment net sales attributable
to the Chambers acquisition (Chambers Sales) were $6.1 million, which essentially offset lower
net sales of other belts and small leather goods compared to the fiscal 2009 first quarter.
Increased gifts segment net sales to one customer in the first quarter of fiscal 2010 exceeded the
segments $2.0 total net sales increase over last year.
Contributing to the lower accessories segment net sales was our fiscal 2009 implementation of an
aggressive product life-cycle management program which included moving away from low margin
products with either small shipping quantities or slow turnover rates. Also, our customers
continue to take a very conservative approach toward replenishing inventory even though the
economic environment is improving. This impacted sales of products
popular in back-to-school sales. In addition, the first quarter of fiscal 2009 included sales to
companies which have suffered severe financial difficulties, including bankruptcy.
The overall gross margin increase in the fiscal 2010 first quarter compared to fiscal 2009 is
largely attributable to Chambers Sales. Our total margin percentage of sales improved 3.6
percentage points over last year. The accessories segment margin percentages improved as the
result of our product life-cycle management program and higher margins on our new eyewear products.
The margin on Chambers Sales was somewhat lower than the margin on other belts and small leather
goods as the fair value of the acquired inventory sold during the quarter was greater
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than
Chambers carrying value, reflecting the general, administrative, design, and procurement costs we
did not have to incur. The gifts segment margin was almost 150 percentage points greater in the
fiscal 2010 first quarter compared to the same quarter last year as its sales included improved
assortments sourced from overseas suppliers at lower costs.
Total segment operating expenses were slightly higher in the first quarter of fiscal 2010 compared
to the prior year, but were smaller as a percentage of net sales. The accessories segment incurred
a percentage of net sales increase of less than one percentage point and the gifts segments
increased net sales over last year reduced its operating expense to net sales ratio by 16.8
percentage points.
Expenses And Taxes
Selling, general and administrative expenses not included in segment income (SG&A) for the first
quarter of fiscal 2010 were $617,000 more than those incurred in the first quarter of fiscal 2009.
An increase in the market value of our common stock held by the Benefit Restoration Plan Trust and
higher employee benefit costs such as health care were the major contributors to the increase.
Other less significant cost increases offset a $360,000 reduction in salaries and wages.
Acquisition transactions costs of $289,000 we incurred in connection with the Chambers transaction
have been expensed in accordance with the acquisition method of accounting adopted effective July
1, 2009. Had the acquisition been completed in fiscal 2009, those costs would have been added to
the carrying value of the assets acquired.
Depreciation and amortization, which had been declining as equipment and software were reaching the
end of their estimated depreciable lives, increased as the result of acquiring equipment in the
Chambers transaction.
Interest expense in the first quarter of fiscal 2010 was $120,000 more than in the same quarter
last year. Almost equal parts were attributable to our credit facility (higher debt cost
amortization and interest rates on outstanding borrowings) and the Chambers acquisition earn-out
liability discount amortization.
Information about our income taxes is incorporated herein by reference to Note 8 of the notes to
consolidated financial statements in Item 1 of this Quarterly Report.
SEASONALITY
Historically our first and second quarter sales and operating results reflect a seasonal increase
compared to the third and fourth quarters of our fiscal year. Sales
for the first quarters of fiscal 2010 and 2009 were not consistent with historical patterns due to the very difficult retail
environment. Operating results for the first three months of fiscal 2010 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity, which we believe will provide adequate financial resources for
our foreseeable working capital needs, are cash flows from operating activities and our credit
facilities ($28.4 million borrowing availability at September 30, 2009). Information about our
credit facilities is incorporated herein by reference to Note 6 of the notes to consolidated
financial statements included in Item 1 of this Quarterly Report.
Our first quarter operating activities result in net cash outflows in preparation for the holiday
season as sales and accounts receivable increase in September and we procure inventory to be
shipped to customers in our second quarter. Also contributing to the fiscal 2010 first quarter
outflow was the payment of incentive compensation accrued in fiscal 2009.
Investing activities related to the Chambers transaction consisted of the $4.4 million estimated
present value of an earn-out agreement, a noncash financing activity, and $3.9 million in cash from
operating activities paid for the assets listed in Note 4 of the notes to consolidated financial
statements in Item 1 of this Quarterly Report incorporated herein by reference. Purchases of
property and equipment in the first quarter of fiscal 2010 were primarily in preparation for the
planned move of our corporate offices into our lower-cost Dallas distribution facility at the end
of our second fiscal quarter.
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Financing activities included credit facility net borrowings of $16.5 million and $15.1 million in
the first quarters of fiscal 2010 and 2009, respectively, to fund our operating activities.
Dividend payments were suspended in December 2008 in light of the ongoing decline in economic
conditions in order to preserve capital and enhance our financial flexibility for investing in key
growth initiatives. The dividend suspension will be reassessed on an ongoing basis.
CRITICAL ACCOUNTING POLICIES
There have been no significant changes in the critical accounting policies disclosed in our Annual
Report on Form 10-K for the year ended June 30, 2009.
ITEM 4T CONTROLS AND PROCEDURES
Disclosure Controls And Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of September 30, 2009 in alerting them in a timely manner to material
information required to be disclosed by us in the reports we file with or submit to the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the first quarter
of fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1A RISK FACTORS
In addition to the information in this Quarterly Report on Form 10-Q, consideration should be given
to the risk factors in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the
year ended June 30, 2009 which could materially and adversely affect our business, results of
operations, and financial condition. There have been no significant changes in the risk factors
disclosed in our 2009 Annual Report on Form 10-K other than the updates set forth below.
Inability to enter into agreements extending or replacing recently acquired licenses could
adversely impact our financial condition and results of operations.
The carrying value of more than half the assets acquired in the Chambers transaction described in
Note 4 of the notes to consolidated financial statements in Item 1 of this Quarterly Report could
be impaired if we are not able to enter into agreements with Wrangler Apparel, Inc. which extend or
replace the Wrangler licenses we assumed. To the extent the assets are impaired, their carrying
value would have to be removed from the balance sheet and expensed.
Changes in the estimated fair value of earn-out contingent consideration could materially impact
our results of operations.
We made significant judgments in determining the appropriateness of the acquisition-date
assumptions in estimating the fair value of the Chambers transaction earn-out contingent
consideration and similar judgments will be made as we revalue the fair value each reporting
period. Future operating results could be materially impacted if economic conditions affect our
net sales estimates or if we make a significant change in the present value discount rate.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases Of Equity Securities
The following provides information about repurchases of shares of common stock made by us during
the quarter ended September 30, 2009. All such shares were purchased in the open market and are
held in a rabbi trust established under our Benefit Restoration Plan.
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Total Number Of | Maximum Number | |||||||||||||||
Total | Shares Purchased | Of Shares That May | ||||||||||||||
Number | Average | As Part Of Publicly | Yet Be Purchased As | |||||||||||||
Of Shares | Price Paid | Announced Plans | Part Of The Plans | |||||||||||||
Period | Purchased | Per Share | Or Programs | Or Programs | ||||||||||||
July 1, 2009 to July 31, 2009 |
3,221 | $ | 2.67 | N/A | N/A | |||||||||||
August 1, 2009 to August 31, 2009 |
| | N/A | N/A | ||||||||||||
September 1, 2009 to September 30, 2009 |
| | N/A | N/A | ||||||||||||
Total |
3,221 | 2.67 | N/A | N/A |
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our 2009 Annual Meeting of Stockholders on October 27, 2009, our stockholders voted on proposals
to (1) elect five directors to our board of directors, and (2) ratify the appointment of Ernst &
Young LLP as our independent auditor for fiscal 2010.
Dr. James F. Gaertner, Mr. Roger R. Hemminghaus, Mr. George C. Lake, Mr. N. Roderick McGeachy, III,
and Mr. Gene Stallings were re-elected to our board of directors to serve until the 2010 annual
meeting of stockholders, or until their successors are elected and qualified. The number of votes
cast for and withheld for each nominee was as follows:
Nominee | For | Withheld | ||||||
James F. Gaertner |
5,897,923 | 434,121 | ||||||
Roger R. Hemminghaus |
5,920,345 | 411,699 | ||||||
George C. Lake |
5,919,880 | 412,164 | ||||||
N. Roderick McGeachy, III |
6,283,830 | 48,214 | ||||||
Gene Stallings |
4,224,141 | 2,107,903 |
Votes on the proposal to ratify the appointment of Ernst & Young LLP as our independent auditor for
fiscal 2010 were as follows:
For |
6,312,611 | Against | 17,540 | Abstain | 1,893 |
Continuing members of our board of directors are: Ms. Colombe M. Nicholas, Mr. W. Grady Rosier, and
Mr. William D. Summitt whose terms expire in 2010.
ITEM 6 EXHIBITS
The Exhibit Index immediately preceding the exhibits required to be filed is incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
TANDY BRANDS ACCESSORIES, INC. (Registrant) |
||||
November 13, 2009 | /s/ N. Roderick McGeachy, III | |||
N. Roderick McGeachy, III | ||||
President and Chief Executive Officer (principal executive officer) |
||||
/s/ M.C. Mackey | ||||
M.C. Mackey | ||||
Chief Financial Officer (principal financial officer and principal accounting officer) |
||||
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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||||||||||
(if applicable) | ||||||||||||||||||||
Exhibit Number and Description | Form | Date | File No. | Exhibit | ||||||||||||||||
(3) | Articles of Incorporation and Bylaws | |||||||||||||||||||
3.1 | Certificate of Incorporation of
Tandy Brands Accessories, Inc. |
S-1 | 11/02/90 | 33-37588 | 3.1 | |||||||||||||||
3.2 | Certificate of Amendment of the
Certificate of Incorporation of Tandy
Brands Accessories, Inc. |
8-K | 11/02/07 | 0-18927 | 3.1 | |||||||||||||||
3.3 | Amended and Restated Bylaws of
Tandy Brands Accessories, Inc.,
effective July 2007 |
8-K | 7/13/07 | 0-18927 | 3.01 | |||||||||||||||
3.4 | Amendment No. 1 to Amended and
Restated Bylaws of Tandy Brands
Accessories, Inc. |
8-K | 11/02/07 | 0-18927 | 3.2 | |||||||||||||||
(4) | Instruments Defining the Rights of Security Holders, Including Indentures | |||||||||||||||||||
4.1 | Form of Common Stock Certificate
of Tandy Brands Accessories, Inc. |
S-1 | 12/17/90 | 33-37588 | 4.2 | |||||||||||||||
4.2 | Certificate of Elimination of
Series A Junior Participating
Cumulative Preferred Stock of Tandy
Brands Accessories, Inc. |
8-K | 10/24/07 | 01-18927 | 3.1 | |||||||||||||||
4.3 | Credit Agreement by and between
Tandy Brands Accessories, Inc. and
Comerica Bank dated as of February 12,
2008 |
10-Q | 2/14/08 | 0-18927 | 4.3 | |||||||||||||||
4.4 | Amendment No. 1 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of March 31, 2009 |
10-Q | 5/14/09 | 0-18927 | 4.4 | |||||||||||||||
4.5 | Amendment No. 2 to Credit
Agreement dated as of February 12,
2008 by and between Tandy Brands
Accessories, Inc. and Comerica Bank
effective as of October 6, 2009** |
N/A | N/A | N/A | N/A | |||||||||||||||
(10) | Material Contracts | |||||||||||||||||||
10.1 | Amendment No. 2 to Credit Agreement
dated as of February 12, 2008 by and
between Tandy Brands Accessories, Inc.
and Comerica Bank effective as of
October 6, 2009** |
N/A | N/A | N/A | N/A | |||||||||||||||
10.2 | Amendment No. 9 to the Tandy Brands
Accessories, Inc. Employees Investment
Plan effective as of January 1, 2009* ** |
N/A | N/A | N/A | N/A |
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TANDY BRANDS ACCESSORIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT INDEX
Incorporated by Reference | ||||||||||||||||||||
(if applicable) | ||||||||||||||||||||
Exhibit Number and Description | Form | Date | File No. | Exhibit | ||||||||||||||||
(31) | Rule 13a-14(a)/15d-14(a) Certifications | |||||||||||||||||||
31.1 | Certification Pursuant to Rule
13a-14(a)/15d-14(a) (Chief Executive
Officer)** |
N/A | N/A | N/A | N/A | |||||||||||||||
31.2 | Certification Pursuant to Rule
13a-14(a)/15d-14(a) (Chief Financial
Officer)** |
N/A | N/A | N/A | N/A | |||||||||||||||
(32) | Section 1350 Certifications | |||||||||||||||||||
32.1 | Section 1350 Certifications (Chief
Executive Officer and Chief Financial
Officer)** |
N/A | N/A | N/A | N/A |
* | Management contract or compensatory plan | |
** | Filed herewith |
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